Why The Music Business Needs Spotify


As everyone on earth knows by now, Steve Jobs introduced a refreshed line of iPods, an updated iTunes with social networking and a “re-imagined” Apple TV on Tuesday. Will any of this result in more music sales? Hell no. It’s common knowledge that the recording industry has become Steve Jobs’ bitch. And the TV business is about to get a taste of his strong pimp hand.

In the meantime major record labels are trying desperately to hang on, trying to prop up a dying industry. UMG reported that although digital sales are up, it’s not enough to compensate for the drastic drop in CD sales. And you have the likes of Warner Music, whose rich kid CEO thinks that he can simply force his will on any entrepreneurs who have gone out there, put their necks on the line and raised millions of dollars just to help the recording industry solve their problem. Rumours have it that such is the case with Spotify.

A friend sent me an interesting article from theĀ  Guardian.co.uk that ran on the eve of the big Apple press conference. It got me thinking about why the industry needs Spotify. Here’s the bulk of the piece:

Sales figures for the quarter to June showed 9 million sold – the lowest quarterly number since 2006. The iPod, launched in October 2001, looks to be in terminal decline. Apple is unworried – sales of its iPhone and iPad are booming – but the drooping figures for the digital music player market are a concern for another sector: music companies.

The music industry had looked to the iPod to drive people to buy music in download form, whether from Apple’s iTunes music store or from newer competitors such as Amazon. The problem for them is that digital music sales are only growing as fast as those of Apple’s devices.

”At a time where we’re asking if digital is a replacement for the CD, as the CD was for vinyl, we should be starting to see a hockey-stick growth in download sales,” says Mark Mulligan, an analyst at Forrester Research who specialises in music and digital media.”Instead, we’re seeing a curve resembling that of a niche technology.”

At the International Federation of the Phonographic Industry, which represents the worldwide music industry, a spokesman agrees that the growth of digital sales has slowed. Figures for 2009 released this year show that while CD sales fell by 12.7%, losing $US1.6 billion in value, digital downloads only grew by 9.2%, gaining less than $US400 million in value.

As iPod sales slow, digital music sales are likely to slow too. The iPod has been the key driver: the federation’s figures show no appreciable digital download sales until 2004, the year Apple launched its iTunes music store internationally (it launched it in the US in April 2003).

Since then, international digital music sales have climbed steadily, exactly in line with the total sales of iPods and iPhones. Apple has much more profitable fish to fry, in the form of TV shows and films, apps and ebook sales to its iPhone and iPad. It gets 30% of the sale price on apps and ebooks, roughly the same as it does on music download sales, but those sales are expanding exponentially, while music downloads are not.

One important difference, not yet reflected in sales figures, is the rise of services that offer ”streaming”, either funded by advertising or direct subscription. The British Phonographic Industry, which represents the big British record labels, says revenues from such ”performance” outlets made up about $US800 million of world revenues in 2009, and has been rising by about $US100 million annually since 2004.

It may be premature to predict the death of the iPod just yet – but it’s unlikely that even Steve Jobs will be able to produce anything that will revive it.

And that means that the music industry is having to look around again for a new stepping stone to growth – if one exists”.

According to this, the music industry should welcome any rational business model that comes down the pike. The old saying “beggars can’t be choosers” should be prominently posted in every office in every record label. Unfortunately label execs choose to see this in reverse: the entrepreneurs, the very people who want to help save the music industry, are tortured and made to beg for the slightest crumb of cooperation, and then pay very dearly for it. It’s like Uday and Qusay have come back as record company execs.

Since a lot of these start-ups have gotten direct investment from some of the record labels, you’d think that they’d do whatever they could to help the fledgling business get off the ground. In fact, the contrary has proven to be true. I only have to mention Imeem to illustrate the point.

But why Spotify? What makes them so special that they really don’t deserve to get the Uday treatment from Junior? It’s simple really.

First of all, it’s simple and it works. Simplicity is the key and that’s what makes all of the Spotify competitors look lame by comparison. It’s hands down the best of its class.

It also works on a business level, as the service has established an impressive and growing consumer base in Europe. Of course, if you’re a record label guy, that doesn’t count. All that matters is the US and anything that works anywhere else will never work in the US. There’s just no rational reason to believe that the same model would not be successful here.

Another thing that separates Spotify from the competition: they’re smarter. Flat out. They just completed their first major hardware deal with Sonos and clearly there’s more to come.

The record labels may say that the conversion rate isn’t high enough. Well nothing short of 100% conversion rate will satisfy these guys. The service definitely converts free users to paying customers and they have the data to prove it. If you own a company in a rapidly dying industry, take whatever you can get and be thankful.

The Guardian news article states that the decline of iPod sales is tied directly to a decline in digital music sales. iPhones and iPads may be selling in droves, but this simply supports the argument for Spotify. Kids want their entire music libraries on their portable devices. It’s like a badge of honour amongst their friends to have the most number of tracks on their iPod.

Forget about the fact that they will never listen to 95% of them, but it goes back to who has the biggest. They all want tens of thousands tracks on their devices (and guess what – they aren’t all iTunes). With the storage limitations of the new mobile smart devices, Spotify gives a kid the ability to carry around a library of millions of tracks and still have plenty of space left for games and movies. And that’s legal music.

Instead of getting pissy with Spotify, the WMGs of this world should be grateful that someone is willing to put their arses on the line for them.

But just like kids with their iPods, labels have to have the biggest. It’s like there’s a huge fire raging, but it’s OK because there’s this wonderful fiddle music.

Related Posts:

Who’s Afraid of Spotify?

Spotify’s on TV, But it Still Needs Partner Deals

Spotify Community ShareMyPlaylists has Six-Figure Funding to Go Proper

Wall Street Slaps Down Junior

Vevo Pulls UMG Music Videos from MTV Sites Over Ad Dispute

Trying to Get a Bite of the Apple

The Ongoing Devaluation of Music

UK Evolution of Digital Media Survey Points to Consumer Rejection of Subscription Services?


Wayne provides biting, hard edged, entertaining, humorous, sometime satiric but always provocative commentary on current events and trends in the music industry.

Discussion2 Comments

  1. Although as I’ve read on, I’d definitely say that buying digital tracks is often hard to justify if you’re limited by budget if you can listen to it on Spotify. Hopefully the more people that use the service, the bigger the pay-out will become for artists and labels. At the moment an artist earns barely anything from Spotify, unless they have millions of daily plays, but if people made more money, maybe the record labels, such as WMG, would be more supportive.

    Actually buying music at all seems almost antiquated these days, so we either have to ensure more payouts for artists or accept that less people will simply be able to afford to be musicians, which could potentially mean less choice and overall lower quality. The internet has given the opportunity for anyone to make music and upload it, but for talented people to stay in the game they need to get paid, and so I agree that however music listeners want their music delivered, the industry should respond in order to ensure the maximum number of listeners and therefore revenues for artists and labels.

  2. I would have thought that if the sale of iPods is dropping, but the sale of iPhones is booming, then surely this is case of one product being replaced with another?

    If you’re thinking that your iPod is a bit dated and therefore you’re considering buying a new one, maybe it makes more sense to buy an iPhone as it’s essentially an iPod Touch with a phone in it, which you can buy for a monthly charge rather than a big lump sum.

    Does this mean that the music industry is adversely affected because the sale of iPods are declining? Probably not if people are using their iPhones – and iPads – to download music onto instead. People are recognising that a standalone music player is starting to feel a bit antiquated when you put it next to the iPhone and iPad, which are also great music players and more.

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